Ron Johnson Stays the Course at J.C. Penney

His program is under more scrutiny, particularly the everyday low pricing piece, after the retailer on Friday posted poor results for the second quarter.

Mistakes were made and maybe he’s a little misunderstood. But Ron Johnson, chairman and chief executive of J.C. Penney Co. Inc., isn’t about to back away from his reinvention strategy for the store.

Johnson’s program is under more scrutiny, particularly the everyday low pricing piece, after Penney’s on Friday posted poor results for the second quarter. Moody’s downgraded the business to Ba3 from Ba1 because it believes Penney’s will face double-digit sales declines for the remainder of 2012 until it anniversaries its new pricing and gross margin pressure in the third quarter as it clears second-quarter excess inventory.

Yet at a meeting with analysts and investors in New York the same day, Johnson stated, “We’re not going to short-circuit a really strong business strategy for the sake of five months. The first and most encouraging thing to me is that I am completely convinced our transformation is on track.

“We’ve got to maintain a full-price business. We will not do anything to change that path,” he added.

Johnson, along with his chief financial officer Ken Hannah, outlined several innovations ahead, updated progress on brands with shops inside Penney’s, including Levi’s and Liz Claiborne, and stressed that the company’s balance sheet is strong, with plenty of cash and a virtually untapped credit line and with the reinvention funded by operations.

“We are now entering phase two of our transformation. We are excited. We fully expect to resume growth in fiscal 2013,” Johnson said.

For now, Penney’s feels the impact of its reinvention. The company had a net loss of $147 million, or 67 cents a share, in the quarter ended July 28. On an adjusted basis, excluding restructuring and management transition charges, inventory transition markdowns, gains on the redemption of the Simon Property Group real estate investment trust units and other charges, Penney’s had a net loss of $81 million, or 37 cents a share.

Comparable-store sales for the quarter fell 21.7 percent. Total sales decreased 22.6 percent, which includes discontinuing outlets. Internet sales through jcp.com were $220 million, a 32.6 percent fall from last year. Reduced marketing hurt sales during the latter half of the quarter.

“We said this would be a really tough year,” Johnson explained. “Somehow I don’t think that message got through. Transforming a company is a marathon, not a sprint.”

He did convey the full plate of change under way, citing the remaking of the selling floors, with new brands and shops, such as Joe Fresh, the hot Canadian brand, which recently unveiled a rollout inside Penney’s, and tweaking the marketing in hopes that customers better understand the values provided by the new pricing.

Johnson cited several upcoming technology initiatives, including an Oracle platform over the next three years with 60 percent fewer applications than the current one, a new digital platform for the online store, personal checkouts and mobile point-of-sale. By spring, employees will be equipped with iPads.

Also, Penney’s expects to be fully RFID by spring; plans to go paperless, except for signs, and will unveil a prototype 130,000-square-foot store in fall 2013 that will “feel like a shopping mall.”

He said Penney’s is reinventing to a new retail format called the “specialty department store,” meaning the stores will be entirely merchandised by shops, and that the new environment presents “no limits to the type of merchandise we can carry. We are going to explore new categories from what we carry today.”

The in-store environment will also feature the Street, which Johnson described as more than just a main aisle. It’s for mannequins, for relaxing, for coffee and juice bars and food, mobile checkouts and iPads for shoppers to use. There will also be the “jcp bar” for returns, cash checkouts and pickups from online orders.

For the first time, Johnson described the Square, another selling floor concept for the future. “It will be a dynamic seasonal space with unique items, light food and beverage and engaging experiences.” For holiday, there will be a trim-a-tree area, stockings, greeting cards and Santa. For the January-February period, the mix will switch to activewear, juices and pilates and yoga classes. “Every two months we will change the focus in the Square,” Johnson said.

He did acknowledge some tactical mistakes made this year. He said the marketing “overreached. It didn’t do the hard work. People found it entertaining but it wasn’t doing what we needed to do to build our business. There was too much TV and not enough print.

“It’s very clear that withdrawing from the promotional model to the everyday model was harder than anticipated, but the promotional model had run its course....This company was founded on the everyday pricing strategy. The everyday business model is unique to us and is in our DNA,” Johnson said.

However, when it was implemented in February, “We hadn’t fully embraced it. We didn’t have the courage to embrace our history.” He said new TV spots will begin airing in September to clarify the pricing. The everyday model also included “monthly values,” which further muddled the pricing but were recently discontinued.

“On Aug. 1, we simplified our pricing — to everyday low price and clearance. For six weeks, every merchant went through our entire merchandise and repriced,” said Johnson.

In addition, the marketing budget shifted from “brand-building to business-building” with reduced spending on TV advertising and increased investments in newspaper preprints hyping brands, products and pricing, rather than branding the business. Penney’s also “retooled” signs in the stores, and started offering free haircuts to children, from kindergarten up to the sixth grade, to jump-start back-to-school business and get more adults and kids into the stores.

Johnson also countered speculation Penney’s was getting resistance from brands. “My hardest job is having to say no to people who want to put a shop in J.C. Penney,” he said. “The interest has exploded. The challenge is it’s been a year of transformation. It’s really painful for them. We are retaining our payment terms, and we reduced our level of vendor support that we traditionally collected.”

Hannah added that Penney’s will end the year with more than $1 billion in cash, which includes capital expenses and paying off debt, but does not include monetizing any noncore assets. Penney’s also has a $1.5 billion asset-backed bank line, with a $250 million accordion feature. As previously reported, Penney’s is reducing annual expenses by $900 million, with $400 million coming out of stores; $350 million from the home office, and $150 million from the marketing.

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